Bandwidth(BAND) - 2025 Q2 - Quarterly Report

Special Note Regarding Forward-Looking Statements The report contains forward-looking statements subject to risks and uncertainties, which the company does not commit to update - This section highlights that the report contains forward-looking statements, which are not historical facts and are subject to risks, uncertainties, and other factors detailed in the 'Risk Factors' section. The company does not undertake to update these statements unless required by law[8][10][11] - Forward-looking statements cover various aspects including macroeconomic conditions, customer acquisition/retention, network traffic growth, cybersecurity, financial expectations (revenue, costs, gross margin, Adjusted EBITDA, non-GAAP net income, capital expenditures), liquidity, employee retention, international expansion, new product introduction, competitive landscape, technology evolution, accounting standards, regulatory compliance, intellectual property, litigation, and debt-related risks[8][12] PART I - FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's analysis of financial condition Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, income, and cash flow statements Unaudited Condensed Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets (In thousands) | Item | As of June 30, 2025 | As of December 31, 2024 | | :-------------------------------- | :-------------------- | :---------------------- | | Assets | | | | Cash and cash equivalents | $60,136 | $81,812 | | Marketable securities | $8,000 | $1,975 | | Accounts receivable, net | $89,158 | $86,455 | | Total current assets | $176,413 | $187,812 | | Goodwill | $356,185 | $317,243 | | Total assets | $1,022,482 | $989,166 | | Liabilities | | | | Accounts payable | $21,292 | $28,362 | | Accrued expenses and other current liabilities | $94,196 | $101,819 | | Total current liabilities | $134,892 | $140,323 | | Convertible senior notes (non-current) | $247,025 | $281,284 | | Total liabilities | $637,944 | $676,633 | | Stockholders' Equity | | | | Total stockholders' equity | $384,538 | $312,533 | | Total liabilities and stockholders' equity | $1,022,482 | $989,166 | Unaudited Condensed Consolidated Statements of Operations This section details the company's revenues, expenses, and net income or loss over specific reporting periods Condensed Consolidated Statements of Operations (In thousands, except per share amounts) | Item | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $180,013 | $173,602 | $354,254 | $344,635 | | Cost of revenue | $108,349 | $108,773 | $211,078 | $214,322 | | Gross profit | $71,664 | $64,829 | $143,176 | $130,313 | | Total operating expenses | $75,412 | $70,903 | $151,611 | $146,803 | | Operating loss | $(3,748) | $(6,074) | $(8,435) | $(16,490) | | Net (loss) income | $(4,931) | $4,055 | $(8,671) | $(5,178) | | Basic net (loss) income per share | $(0.16) | $0.15 | $(0.29) | $(0.19) | | Diluted net (loss) income per share | $(0.16) | $(0.17) | $(0.29) | $(0.19) | Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) This section presents the net income or loss along with other comprehensive income items not recognized in net income Condensed Consolidated Statements of Comprehensive Income (Loss) (In thousands) | Item | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income | $(4,931) | $4,055 | $(8,671) | $(5,178) | | Foreign currency translation, net of income taxes | $34,781 | $(3,007) | $50,190 | $(12,347) | | Total comprehensive income (loss) | $29,851 | $1,165 | $41,573 | $(17,399) | Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity This section outlines the changes in the company's equity accounts over the reporting periods - Total stockholders' equity increased from $312,533 thousand as of December 31, 2024, to $384,538 thousand as of June 30, 2025. Key changes include $24,073 thousand in stock-based compensation and a significant positive foreign currency translation adjustment of $50,190 thousand for the six months ended June 30, 2025, despite a net loss of $(8,671) thousand[15][28][21] Unaudited Condensed Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (In thousands) | Activity | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $28,638 | $26,901 | | Net cash used in investing activities | $(22,067) | $(5,303) | | Net cash used in financing activities | $(29,067) | $(91,020) | | Effect of exchange rate changes on cash | $657 | $(608) | | Net decrease in cash, cash equivalents, and restricted cash | $(21,839) | $(70,030) | | Cash, cash equivalents, and restricted cash, end of period | $60,395 | $62,277 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1. Organization and Description of Business This note describes the company's business, its global cloud-based communications platform-as-a-service operations - Bandwidth Inc. is a global cloud-based, software-powered communications platform-as-a-service (CPaaS) provider, enabling enterprises to create, scale, and operate voice or messaging communication services across mobile applications or connected devices[36] Note 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and policies used in preparing the financial statements - The financial statements are prepared in accordance with GAAP and SEC rules for interim reporting, with certain information condensed or omitted. Management's opinion is that the statements fairly present the financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods[37][39] - The allowance for doubtful accounts and reserve for expected credit losses was approximately $2.1 million as of June 30, 2025, and $2.2 million as of December 31, 2024. Unbilled receivables were $49.2 million and $46.8 million, respectively[46][47] - The company adopted ASU 2023-09 (Income Taxes) effective January 1, 2025, which will impact annual disclosures but not financial position or results of operations. ASU 2024-03 (Expense Disaggregation) and ASU 2024-04 (Induced Conversions of Convertible Debt) are not yet adopted, with the company evaluating their potential impact[51][52][53] Note 3. Fair Value Measurements This note details the fair value hierarchy and measurements for financial assets and liabilities Fair Value Measurements of Financial Assets (In thousands) | Item | As of June 30, 2025 (Total Fair Value) | As of December 31, 2024 (Total Fair Value) | | :-------------------------------- | :------------------------------------- | :--------------------------------------- | | Cash and cash equivalents (Level 1) | $52,128 | $76,248 | | Marketable securities (Level 1) | $8,000 | $1,975 | | Total financial assets | $60,128 | $78,223 | Fair Value of Convertible Notes (Level 2, In thousands) | Item | As of June 30, 2025 | As of December 31, 2024 | | :-------------------------------- | :------------------ | :---------------------- | | 2026 Convertible Notes | $7,100 | $31,800 | | 2028 Convertible Notes | $206,300 | $199,000 | - Marketable securities, primarily time deposits and commercial paper, are classified as available-for-sale and are current assets. As of June 30, 2025, they were in an unrealized gain position, and the company expects to recover their amortized cost basis[57][60] Note 4. Financial Statement Components This note provides disaggregated information for various financial statement line items, including receivables and liabilities Accounts Receivable, Net of Allowances (In thousands) | Item | As of June 30, 2025 | As of December 31, 2024 | | :-------------------------------- | :------------------ | :---------------------- | | Trade accounts receivable | $41,679 | $41,727 | | Unbilled accounts receivable | $49,229 | $46,795 | | Allowance for doubtful accounts and reserve for expected credit losses | $(2,062) | $(2,172) | | Other accounts receivable | $312 | $105 | | Total accounts receivable, net | $89,158 | $86,455 | Accrued Expenses and Other Current Liabilities (In thousands) | Item | As of June 30, 2025 | As of December 31, 2024 | | :-------------------------------- | :------------------ | :---------------------- | | Accrued expense | $69,543 | $63,665 | | Accrued compensation and benefits | $13,045 | $25,992 | | Accrued sales, use, VAT and telecommunications related taxes | $7,019 | $7,898 | | Customer deposits | $4,064 | $3,710 | | Other accrued expenses | $525 | $554 | | Total accrued expenses and other current liabilities | $94,196 | $101,819 | - The allowance for expected credit losses decreased from $(2,172) thousand at December 31, 2024, to $(2,062) thousand at June 30, 2025, primarily due to deductions (write-offs) of $1,206 thousand for the six months ended June 30, 2025[64] Note 5. Leases This note describes the company's operating lease arrangements, costs, and future payment obligations - The company primarily leases office space under non-cancelable operating leases expiring between 2025 and 2043. A sublease of a portion of its corporate headquarters to Relay, Inc., a related party, commenced on January 1, 2025, generating $0.5 million in rental payments for the three months ended June 30, 2025, and $1.1 million for the six months ended June 30, 2025[65][66] Operating Lease Costs and Maturities (In thousands) | Item | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $5,788 | $5,739 | $11,448 | $11,769 | | Sublease income | $(545) | $0 | $(1,090) | $0 | | Total net lease cost | $5,243 | $5,739 | $10,358 | $11,769 | Maturities of Operating Lease Liabilities (As of June 30, 2025, In thousands) | Year | Amount | | :-------------------------------- | :------- | | 2025 (remaining) | $11,546 | | 2026 | $23,132 | | 2027 | $23,222 | | 2028 | $23,399 | | 2029 | $23,818 | | Thereafter | $357,115 | | Total lease payments | $462,232 | Note 6. Property, Plant and Equipment This note details the company's property, plant, and equipment, including depreciation and capitalized software costs Property, Plant and Equipment, Net (In thousands) | Item | As of June 30, 2025 | As of December 31, 2024 | | :-------------------------------- | :------------------ | :---------------------- | | Total cost | $297,327 | $278,117 | | Less—accumulated depreciation | $(118,705) | $(101,294) | | Total property, plant and equipment, net | $178,622 | $176,823 | Total Depreciation Expense (In thousands) | Period | 2025 | 2024 | | :-------------------------------- | :----- | :----- | | Three months ended June 30, | $8,750 | $7,964 | | Six months ended June 30, | $16,966 | $16,017 | - The company capitalized $5.5 million in software development costs for the six months ended June 30, 2025, and recognized $3.1 million in amortization expense related to these costs for the three months ended June 30, 2025[71][72] Note 7. Goodwill and Intangible Assets This note provides information on the company's goodwill and other intangible assets, including amortization Goodwill and Intangible Assets, Net (In thousands) | Item | As of June 30, 2025 | As of December 31, 2024 | | :-------------------------------- | :------------------ | :---------------------- | | Goodwill | $356,185 | $317,243 | | Intangible assets, net | $149,730 | $145,355 | Total Amortization Expense (In thousands) | Period | 2025 | 2024 | | :-------------------------------- | :----- | :----- | | Three months ended June 30, | $4,565 | $4,336 | | Six months ended June 30, | $8,852 | $8,697 | - Goodwill increased by $38,942 thousand due to foreign currency translation adjustments. The remaining weighted average amortization period for definite-lived intangible assets is 8.5 years[73][74] Note 8. Debt This note outlines the company's debt obligations, including revolving credit facility and convertible senior notes - The company has a $150.0 million revolving credit facility, with no outstanding borrowings as of June 30, 2025, and was in compliance with all covenants. The facility matures on the earlier of May 1, 2029, or 91 days prior to the 2028 convertible notes' maturity[76][81] - Approximately $7.6 million aggregate principal amount of 2026 Convertible Notes remains outstanding after repurchases in February 2025. The 2028 Convertible Notes have an aggregate principal amount of $250.0 million outstanding. The company intends to settle the principal amount of the Convertible Notes with cash upon conversion[84][85][91] Interest Expense Related to Convertible Notes (In thousands) | Item | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | 2026 Convertible Notes | $15 | $204 | $66 | $530 | | 2028 Convertible Notes | $581 | $581 | $1,162 | $1,162 | | Total interest expense | $596 | $785 | $1,228 | $1,692 | Note 9. Revenue This note disaggregates revenue by geographic region and details contract liabilities Revenue by Geographic Region (In thousands) | Region | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $156,554 | $151,508 | $308,346 | $300,970 | | International | $23,459 | $22,094 | $45,908 | $43,665 | | Total | $180,013 | $173,602 | $354,254 | $344,635 | Contract Liabilities (In thousands) | Item | As of June 30, 2025 | As of December 31, 2024 | | :-------------------------------- | :------------------ | :---------------------- | | Contract liabilities | $14,904 | $14,986 | - The company expects to recognize $8.2 million in revenue over the next 12 months related to its contract liabilities as of June 30, 2025[100] Note 10. Stockholders' Equity This note provides details on shares reserved for issuance under stock-based compensation plans Shares of Class A Common Stock Reserved for Issuance (As of) | Item | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :---------------- | | Stock options issued and outstanding | 73,858 | 79,238 | | Nonvested restricted stock units issued and outstanding | 3,413,832 | 4,364,486 | | Stock-based awards available for grant under the 2017 Plan | 7,074,715 | 1,878,290 | | Total | 10,562,405 | 6,322,014 | Note 11. Stock-Based Compensation This note details the company's stock-based compensation expense and unrecognized costs - As of June 30, 2025, total unrecognized compensation cost related to non-vested RSUs was $51.5 million, to be amortized over a weighted-average period of 1.86 years. All outstanding stock options were fully vested prior to December 31, 2022[103][104] Total Stock-Based Compensation Expense (In thousands) | Period | 2025 | 2024 | | :-------------------------------- | :----- | :----- | | Three months ended June 30, | $12,545 | $11,360 | | Six months ended June 30, | $26,120 | $23,699 | Note 12. Commitments and Contingencies This note outlines the company's future payment obligations and ongoing legal proceedings - As of June 30, 2025, the company has $462.2 million in future minimum rent payments for operating leases and $18.3 million in non-cancellable purchase obligations, primarily for network equipment maintenance and software license contracts[107][108] - The company is involved in various litigation, including lawsuits alleging failure to bill, collect, and remit taxes and surcharges for 911 services. Management intends to vigorously defend these lawsuits[109][110] Note 13. Segment Reporting This note clarifies that the company operates as a single operating segment for management purposes - The company manages its business activities on a consolidated basis and operates in one operating segment. The Chief Operating Decision Maker (CEO) uses net loss, budgeted, and forecasted expense information to allocate resources and assess performance[112][113] Note 14. Income Taxes This note provides information on the company's effective income tax rates and related factors Effective Income Tax Rate | Period | 2025 | 2024 | | :-------------------------------- | :----- | :----- | | Three months ended June 30, | (2.8)% | (8.9)% | | Six months ended June 30, | (0.8)% | 9.3% | - The effective tax rate for both periods in 2025 differed from the federal statutory rate of 21% primarily due to a valuation allowance recorded against U.S. federal and state net deferred tax assets. The unfavorable change in 2025 compared to 2024 is also attributed to a decreased tax benefit from operating losses outside the U.S[115][117] Note 15. Related Parties This note discloses transactions and relationships with related parties, including Relay, Inc - Relay, Inc., a former wholly-owned subsidiary distributed to stockholders in 2016, is considered a related party due to the CEO's ownership level. The company commenced a sublease of a portion of its corporate headquarters to Relay, Inc. on January 1, 2025[118] Note 16. Basic and Diluted (Loss) Income per Common Share This note presents the calculation of basic and diluted earnings per share for the reporting periods Net (Loss) Income Per Share | Period | Basic EPS (2025) | Basic EPS (2024) | Diluted EPS (2025) | Diluted EPS (2024) | | :-------------------------------- | :--------------- | :--------------- | :----------------- | :----------------- | | Three months ended June 30, | $(0.16) | $0.15 | $(0.16) | $(0.17) | | Six months ended June 30, | $(0.29) | $(0.19) | $(0.29) | $(0.19) | - For periods with a net loss (three and six months ended June 30, 2025, and six months ended June 30, 2024), diluted shares equal basic shares as potential common shares would be anti-dilutive. Common share equivalents excluded from diluted EPS calculation due to anti-dilutive effects include stock options, restricted stock units, and convertible senior notes[120][121] Note 17. Subsequent Events This note describes significant events that occurred after the balance sheet date, such as new tax legislation - On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was enacted, making permanent key elements of the Tax Cuts and Jobs Act of 2017, including 100% bonus depreciation and domestic research cost expensing. The company is currently evaluating the potential effects of this new law on its financial position, results of operations, and cash flows, with results expected in the Q3 2025 10-Q[123] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, and cash flows, including key performance indicators and non-GAAP measures Overview This section provides a high-level description of the company's business model, strategic growth areas, and financial performance - Bandwidth is a global cloud-based CPaaS provider, leveraging its Communications Cloud and APIs to embed voice, messaging, and emergency services. The business benefits from megatrends like enterprise cloud migration, CCaaS adoption, remote work, customer experience reinvention, messaging growth, and AI application[127][128] - Strategic growth focuses on cross-selling/up-selling existing customers, direct-to-enterprise growth for Global 2000 companies, and being the preferred provider for SaaS platforms using conversational voice/messaging[129] Revenue and Net (Loss) Income (In millions) | Period | Revenue | Net (Loss) Income | | :-------------------------------- | :------ | :---------------- | | Three months ended June 30, 2025 | $180 | $(5) | | Three months ended June 30, 2024 | $174 | $4 | | Six months ended June 30, 2025 | $354 | $(9) | | Six months ended June 30, 2024 | $345 | $(5) | Repurchase of 2026 Convertible Notes This section details the company's repurchase of its 2026 Convertible Notes and the resulting financial impact - In February 2025, the company repurchased approximately $27 million aggregate principal amount of 2026 Convertible Notes for $26 million cash. This resulted in a $1 million gain on extinguishment of debt for the six months ended June 30, 2025, with approximately $8 million principal amount remaining outstanding[131][132] Key Performance Indicator This section defines and presents the company's net retention rate as a crucial measure of customer growth Net Retention Rate | Period | Net Retention Rate | | :-------------------------------- | :----------------- | | Three months ended June 30, 2025 | 112% | | Three months ended June 30, 2024 | 111% | - Net retention rate is a key indicator, calculated by averaging the revenue from a cohort of customers over four quarters, divided by their revenue in the corresponding prior-year quarter. It increases with greater product usage or new product adoption and decreases with reduced usage or price reductions[135] Key Components of Statements of Operations This section explains the primary drivers of revenue, cost of revenue, gross margin, and operating expenses - Cloud communications revenue is primarily derived from reoccurring sources (per minute voice/text usage, other usage fees) and monthly recurring charges (phone number services, 911-enabled services, messaging). Messaging surcharge revenue comes from carrier-imposed fees passed to customers[137][139] - Cost of revenue includes fees to network service providers, network operations costs, personnel costs, allocated facilities/IT costs, amortization of acquired technology, and depreciation. Gross margin is influenced by network investments, off-network cost management, personnel costs, product mix, software amortization, and pricing[141][143] - Operating expenses, primarily personnel costs, are expected to increase with business growth. Research and development, sales and marketing, and general and administrative expenses are detailed, with income tax rates affected by valuation allowances against U.S. deferred tax assets[144][145][146][147][148][149] Results of Operations This section provides a detailed comparison of the company's financial performance across different reporting periods Comparison of the three months ended June 30, 2025 and 2024 This section analyzes the financial performance for the three-month periods, highlighting revenue and expense changes Revenue (Three months ended June 30, In thousands) | Category | 2025 | 2024 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Cloud communications | $135,857 | $128,365 | $7,492 | 6% | | Messaging surcharges | $44,156 | $45,237 | $(1,081) | (2)% | | Total Revenue | $180,013 | $173,602 | $6,411 | 4% | Cost of Revenue and Gross Margin (Three months ended June 30, In thousands) | Item | 2025 | 2024 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Cost of revenue | $108,349 | $108,773 | $(424) | 0% | | Gross profit | $71,664 | $64,829 | $6,835 | 11% | | Total gross margin | 40% | 37% | 3% pts | | - Cloud communications revenue grew 6%, driven by 7% growth in Global Voice Plans and 29% growth in Enterprise Voice, offset by a 5% decrease in Programmable Messaging due to lower political messaging activity. Messaging surcharges decreased 2% for the same reason[153][154] Operating Expenses (Three months ended June 30, In thousands) | Category | 2025 | 2024 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Research and development | $31,749 | $28,132 | $3,617 | 13% | | Sales and marketing | $24,818 | $26,066 | $(1,248) | (5)% | | General and administrative | $18,845 | $16,705 | $2,140 | 13% | | Total operating expenses | $75,412 | $70,903 | $4,509 | 6% | - Interest expense, net, decreased due to the timing effects of cash used for 2024 and 2025 Convertible Notes repurchases. Income tax expense increased, resulting in an effective tax rate of (2.8)% in 2025, compared to (8.9)% in 2024, primarily due to a U.S. valuation allowance and decreased foreign tax benefits[163][164][165] Comparison of the six months ended June 30, 2025 and 2024 This section analyzes the financial performance for the six-month periods, detailing revenue and expense trends Revenue (Six months ended June 30, In thousands) | Category | 2025 | 2024 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Cloud communications | $269,315 | $256,850 | $12,465 | 5% | | Messaging surcharges | $84,939 | $87,785 | $(2,846) | (3)% | | Total Revenue | $354,254 | $344,635 | $9,619 | 3% | Cost of Revenue and Gross Margin (Six months ended June 30, In thousands) | Item | 2025 | 2024 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Cost of revenue | $211,078 | $214,322 | $(3,244) | (2)% | | Gross profit | $143,176 | $130,313 | $12,863 | 10% | | Total gross margin | 40% | 38% | 2% pts | | - Cloud communications revenue increased 5%, driven by 5% growth in Global Voice Plans and 27% growth in Enterprise Voice, while Programmable Messaging decreased 4% due to lower political messaging. Messaging surcharges also declined 3% for the same reason[170][171] Operating Expenses (Six months ended June 30, In thousands) | Category | 2025 | 2024 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Research and development | $62,381 | $57,044 | $5,337 | 9% | | Sales and marketing | $51,274 | $55,205 | $(3,931) | (7)% | | General and administrative | $37,956 | $34,554 | $3,402 | 10% | | Total operating expenses | $151,611 | $146,803 | $4,808 | 3% | - Interest expense, net, increased by $1 million due to less interest income from cash used for Convertible Notes repurchases. Income tax expense increased, resulting in an effective tax rate of (0.8)% in 2025, compared to 9.3% in 2024, primarily due to a U.S. valuation allowance and decreased foreign tax benefits[179][180][181] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations - As of June 30, 2025, the company had $60 million in cash and cash equivalents and $8 million in marketable securities. It also has an available borrowing capacity of $150 million under its revolving credit facility[185][186] - Future commitments include $258 million in Convertible Notes, $462 million in operating lease payments (including a $456 million non-cancelable lease for its new corporate headquarters), and $18 million in non-cancelable purchase obligations[190] - Management believes current cash, equivalents, marketable securities, and operating cash flows will be sufficient for anticipated needs for at least the next 12 months, but acknowledges potential need for additional financing[189] Cash Flows This section provides a summary and analysis of cash generated and used in operating, investing, and financing activities Summary of Cash Flow Information (Six months ended June 30, In thousands) | Activity | 2025 | 2024 | | :-------------------------------- | :----- | :----- | | Net cash provided by operating activities | $28,638 | $26,901 | | Net cash used in investing activities | $(22,067) | $(5,303) | | Net cash used in financing activities | $(29,067) | $(91,020) | | Net decrease in cash, cash equivalents, and restricted cash | $(21,839) | $(70,030) | - Operating cash flow was $29 million, driven by aggregate results and non-cash adjustments, offset by a $13 million cash outflow from lower operating liabilities and higher operating assets. Investing activities used $22 million, primarily for property, plant, and equipment, capitalized software, and marketable securities purchases. Financing activities used $29 million, mainly for the 2025 Convertible Notes repurchases[192][193][194] Non-GAAP Financial Measures This section presents and reconciles non-GAAP financial measures used by management to assess performance Non-GAAP Gross Profit and Non-GAAP Gross Margin This section defines and reconciles non-GAAP gross profit and gross margin, excluding certain non-cash and pass-through items - Non-GAAP gross profit and gross margin exclude depreciation and amortization, amortization of acquired intangible assets, stock-based compensation, and pass-through messaging surcharges to provide a clearer view of core operating performance[197][198][199] Non-GAAP Gross Profit and Margin (In thousands) | Item | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gross Profit | $71,664 | $64,829 | $143,176 | $130,313 | | Non-GAAP Gross Profit | $79,396 | $71,823 | $158,008 | $144,440 | | Gross Profit Margin % | 40% | 37% | 40% | 38% | | Non-GAAP Gross Margin % | 58% | 56% | 59% | 56% | Non-GAAP Net Income This section defines and reconciles non-GAAP net income, adjusting for specific non-recurring and non-cash items - Non-GAAP net income adjusts net income/loss for stock-based compensation, amortization of acquired intangibles, debt discount/issuance costs, acquisition-related expenses, lease termination costs, gain/loss on debt extinguishment, non-recurring items, and estimated tax effects[201][203] Non-GAAP Net Income and EPS (In thousands, except per share amounts) | Item | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income | $(4,931) | $4,055 | $(8,671) | $(5,178) | | Non-GAAP net income | $11,830 | $8,719 | $22,960 | $16,539 | | Non-GAAP basic shares | 29,889,020 | 27,079,333 | 29,438,230 | 26,786,568 | | Non-GAAP diluted shares | 31,382,387 | 30,813,973 | 31,507,821 | 30,946,196 | | Non-GAAP net income per Non-GAAP share (Basic) | $0.40 | $0.32 | $0.78 | $0.62 | | Non-GAAP net income per Non-GAAP share (Diluted) | $0.38 | $0.29 | $0.74 | $0.55 | Adjusted EBITDA This section defines and reconciles Adjusted EBITDA, a key metric for assessing core operating performance - Adjusted EBITDA is a key management measure for core operating performance, excluding income tax, interest, depreciation, amortization, acquisition expenses, stock-based compensation, impairment charges, gain/loss on business sale, lease termination costs, debt extinguishment gain/loss, business interruption gains, and non-recurring items[207][208] Adjusted EBITDA (In thousands) | Item | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income | $(4,931) | $4,055 | $(8,671) | $(5,178) | | Adjusted EBITDA | $21,890 | $18,741 | $44,103 | $34,664 | Free Cash Flow This section defines and reconciles free cash flow, indicating cash available after capital expenditures - Free cash flow is defined as net cash from operating activities minus capital expenditures (property, plant, equipment, and capitalized software development). It serves as a liquidity indicator but has limitations due to working capital timing and exclusion of long-term securities investments[211] Free Cash Flow (In thousands) | Item | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $31,721 | $24,436 | $28,638 | $26,901 | | Net cash used in investing in capital assets | $(6,090) | $(6,116) | $(16,302) | $(12,988) | | Free cash flow | $25,631 | $18,320 | $12,336 | $13,913 | Critical Accounting Policies and Estimates This section highlights the accounting policies and estimates that require significant management judgment - There have been no material changes to the company's critical accounting policies and significant judgments and estimates compared to those disclosed in its Annual Report on Form 10-K filed on February 20, 2025[215] Recently Issued Accounting Guidance This section refers to disclosures regarding new accounting standards and their potential impact - For a summary of recently adopted accounting standards and recent accounting pronouncements not yet adopted, refer to Note 2, 'Summary of Significant Accounting Policies,' in the condensed consolidated financial statements[216] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including interest rate and foreign currency fluctuations - The company's primary market risk exposures are interest rate risk and foreign currency exchange rate risk. Cash and cash equivalents ($60 million) and marketable securities ($8 million) are held for working capital, with interest-earning instruments carrying some interest rate risk[217][218] - Interest on the $150 million Credit Facility accrues at a variable rate tied to SOFR or a base rate, exposing the company to interest rate risk when drawing on the facility. However, the Convertible Notes have fixed interest rates, limiting direct interest rate exposure, though their fair value fluctuates with interest rates and stock price[219][220] - Foreign currency risk arises from international operations, with functional currencies primarily Euro and British Pound. Approximately 13% of total revenue for the six months ended June 30, 2025, was generated outside North America. A hypothetical 10% adverse change in foreign currency exchange rates would have negatively impacted net loss by approximately $2 million for the six months ended June 30, 2025[222] Item 4. Controls and Procedures Management evaluates the effectiveness of disclosure controls and internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2025, ensuring timely and accurate reporting[225] - There were no changes in internal control over financial reporting during the quarter ended June 30, 2025, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[226] - The effectiveness of any internal control system is subject to inherent limitations, including judgment in design and operation, and the inability to eliminate misconduct completely, providing only reasonable, not absolute, assurances[227] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and a list of filed exhibits Item 1. Legal Proceedings This section details the company's involvement in various legal proceedings, including 911 services tax lawsuits - The company is a defendant in multiple lawsuits alleging failure to bill, collect, and remit certain taxes and surcharges associated with 911 services in various jurisdictions, including Illinois. The company intends to vigorously defend these lawsuits[229][230][233] - A lawsuit in San Francisco County regarding 911 taxes was dismissed with prejudice on July 3, 2025. Another complaint in Colorado related to unwanted text messages was dismissed without prejudice on May 20, 2025[231][232] - The company is also subject to other legal actions in the ordinary course of business, including claims related to number management, employment, customer misuse of offerings, and intellectual property infringement. Litigation outcomes are uncertain and can incur substantial costs[234] Item 1A. Risk Factors This section outlines significant risks impacting the company's business, financial condition, and stock price Risk Factors Summary This summary categorizes the principal risks into business, convertible notes, and common stock ownership - The summary categorizes principal risks into three main areas: Risks Related to Our Business, Risks Related to the Convertible Notes, and Risks Related to Ownership of Our Class A Common Stock[236][237][238][240] Risks Related to Our Business This section details various risks inherent to the company's operations, market, and regulatory environment - Future growth depends on factors beyond control, including hiring/retaining personnel, economic health, competition, pricing, new service introduction, technology availability, and regulatory conditions[241][242] - Economic risks include uncertain capital markets, political/economic instability, tariffs, macroeconomic conditions, inflation, and higher interest rates, which could impact gross margins, costs, and customer demand[243][244][245][246] - The company faces intense competition in a rapidly evolving cloud communications market, with larger competitors having greater resources. Failure to attract/retain customers, develop new services, manage international operations, or protect against cybersecurity threats could harm the business[249][250][255][258][262][285][289][293][295] - Use of AI presents risks such as reputational harm, competitive disadvantage, legal liability, and regulatory scrutiny, especially concerning intellectual property and privacy laws. Flaws in AI algorithms or biased datasets could lead to inaccurate outputs and adverse outcomes[265][266][267][268][269][270] - Other risks include complex pricing/billing systems, reliance on third-party suppliers, potential for increased customer churn, declining market prices for services, dependence on senior management, challenges in hiring/retaining qualified personnel, and exposure to additional tax liabilities[275][276][280][281][344][346][347][348][350][351][352][354][355][356][357][358][359][360][361][362][363][364][365] Risks Related to the Convertible Notes This section outlines risks associated with the company's convertible notes, including liquidity and settlement - Servicing the company's debt, including Convertible Notes, requires significant cash flow, which the business may not generate sufficiently. This could necessitate selling assets, restructuring debt, or obtaining additional financing on unfavorable terms[383] - The company may not have sufficient funds for cash settlement upon conversion of Convertible Notes or for repurchasing them following a fundamental change, potentially leading to default or acceleration of other indebtedness[385] - The conditional conversion feature of the Convertible Notes, if triggered, could adversely affect liquidity by requiring cash payments or reclassification of debt to current liability. Capped call transactions may affect the value of Convertible Notes and Class A common stock, and the company is exposed to counterparty risk if option counterparties default[386][387][389][391] Risks Related to Ownership of Our Class A Common Stock This section describes risks pertinent to holding the company's Class A common stock, including price volatility and control - The trading price of Class A common stock may be volatile due to market fluctuations, company performance, analyst coverage, and other factors, potentially leading to investment losses[392][393][396] - Substantial future sales of Class A common stock, especially by directors, executive officers, or significant stockholders, could cause the market price to decline and impede future capital raising[394][395] - The dual-class capital structure concentrates voting control with co-Founder and CEO David A. Morken, limiting other stockholders' influence on corporate matters. This structure may also affect the stock price and eligibility for certain stock indices[397][399][401] - Anti-takeover provisions in organizational documents and Delaware law, including super-majority voting requirements, could delay or prevent acquisition attempts, potentially limiting stockholders' opportunity to receive a premium for their shares[403][404][405][406][407][408] - The company may need additional capital in the future, and failure to raise it on favorable terms could hinder growth and dilute existing stockholders. The company does not intend to pay dividends in the foreseeable future, requiring investors to rely on stock price appreciation for gains[411][412] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms no unregistered sales of equity securities occurred during the reporting period - There were no unregistered sales of equity securities and use of proceeds during the three months ended June 30, 2025[414] Item 5. Other Information This section discloses Rule 10b5-1 trading plans adopted or amended by directors and executive officers Rule 10b5-1 Trading Plans (Three months ended June 30, 2025) | Name and Title | Date of Adoption of Rule 10b5-1 Trading Plan | Scheduled Expiration Date of Rule 10b5-1 Trading Plan | Aggregate Number of Securities to be Purchased or Sold | | :-------------------------------- | :------------------------------------------- | :---------------------------------------------------- | :----------------------------------------------------- | | David A. Morken, Chairman and Chief Executive Officer | 5/21/2025 | 5/15/2026 | Covers the sale of up to 845,088 shares of Class B common stock held by Hazel-Rah III, LLC at prices ranging from $75.00 to $125.00 per share. | Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q - Key exhibits include the Second Amended and Restated Certificate of Incorporation, Third Amended and Restated Bylaws, Third Amended and Restated 2017 Incentive Award Plan, Forms of Global Restricted Stock Unit Grant Notice and Agreement, and CEO/CFO certifications (302 and 906)[419] Signatures This section contains the official signatures confirming the submission of the Quarterly Report on Form 10-Q - The Quarterly Report on Form 10-Q was duly signed on July 29, 2025, by David A. Morken (Chief Executive Officer), Daryl E. Raiford (Chief Financial Officer), and Devin M. Krupka (Senior Vice President, Corporate Controller), confirming its submission[422][423][424]